U.S Gold Prices Make A Vertical Spread Look Appealing

Gold prices have come under pressure after better than expected economic data raised U.S. yields. The data created headwinds for the precious metals market, making a vertical options spread look appealing. The decline in riskier Japanese assets is also creating a deleveraging process, where investors who are underwater on their Nikkei positions are selling assets such as gold to handle margin calls. Gold volatility remains elevated, allowing investors to benefit from further market volatility.

During Thursday's Asian trading session, the Nikkei declined more than 843 points or 6.4%, pushing the index below the 13000 mark. The decline in Japanese equities along with the move into the yen, pushed gold prices lower generating negative momentum.


The five-day moving average for gold prices crossed below the 20-day moving average, showing that a negative short term trend is in place. Momentum as reflected by the MACD (moving average convergence divergence index) is also negative with the MACD generating a sell signal. The spread (the 12-day moving average minus the 26-day moving average) crossed below the nine-day movign average of the spread. The index moved from positive to negative territory, confirming the sell signal. The RSI (relative strength index) is printing near 43, which is on the low end of the neutral range.

Gold implied volatility of the ETF, showing that premiums for options are still relatively elevated compared to the highest levels - excluding the April period. A level of 20% implies that gold prices will move at least 20% on an annualized basis from current levels. At a spot gold price of nearly $1,400, traders are estimating that gold will either be near $1,680 or $1,120 within a year.

Traders who are looking for the gold ETF to further break down can take advantage of a Vertical Put spread, which would allow them to capture $5 on the GLD. The July 130-125 put spread would currently cost an investor $1 per contract, and would give the investor a risk-to-reward profile of 5-to-1. The benefit of this strategy is that the investor simultaneously purchases a 130 put and sells a 125 put. The high level of implied volatility is mitigated by choosing a spread instead of just an outright put position.